SMIC Reports 2008 Third Quarter Results (Revenue up 10%)

Material Litigation

Recent TSMC Legal Developments:

On August 25, 2006, TSMC filed a lawsuit against the Company and certain subsidiaries (SMIC (Shanghai), SMIC (Beijing) and SMIC (Americas)) in the Superior Court of the State of California, County of Alameda for alleged breach of the Settlement Agreement, alleged breach of promissory notes and alleged trade secret misappropriation by the Company. TSMC seeks, among other things, damages, injunctive relief, attorneys' fees, and the acceleration of the remaining payments outstanding under the Settlement Agreement.

In the present litigation, TSMC alleges that the Company has incorporated TSMC trade secrets in the manufacture of the Company's 0.13 micron or smaller process products. TSMC further alleges that as a result of this claimed breach, TSMC's patent license is terminated and the covenant not to sue is no longer in effect with respect to the Company's larger process products.

The Company has vigorously denied all allegations of misappropriation. The Court has made no finding that TSMC's claims are valid, nor has it set a trial date.

On September 13, 2006, the Company announced that in addition to filing a response strongly denying the allegations of TSMC in the United States lawsuit, it filed on September 12, 2006, a cross- complaint against TSMC seeking, among other things, damages for TSMC's breach of contract and breach of implied covenant of good faith and fair dealing.

On November 16, 2006, the High Court in Beijing, the People's Republic of China, accepted the filing of a complaint by the Company and its wholly-owned subsidiaries, SMIC (Shanghai) and SMIC (Beijing), regarding the unfair competition arising from the breach of bona fide (i.e. integrity, good faith) principle and commercial defamation by TSMC ("PRC Complaint"). In the PRC Complaint, the Company is seeking, among other things, an injunction to stop TSMC's infringing acts, public apology from TSMC to the Company and compensation from TSMC to the Company, including profits gained by TSMC from their infringing acts.

TSMC filed with the California court in January 2007 a motion seeking to enjoin the PRC action. In February 2007, TSMC filed with the Beijing High Court a jurisdictional objection, challenging the competency of the Beijing High Court's jurisdiction over the PRC action.

In March 2007, the California Court denied TSMC's motion to enjoin the PRC action. TSMC appealed this ruling to California Court of Appeal. On March 26, 2008, the Court of Appeal, in a written opinion, denied TSMC's appeal.

In July 2007, the Beijing High Court denied TSMC's jurisdictional objection and issued a court order holding that the Beijing High Court shall have proper jurisdiction to try the PRC action. TSMC appealed this order to the Supreme Court of the People's Republic of China. On January 7, 2008, the Supreme Court heard TSMC's appeal. On June 13, 2008, the Supreme Court denied TSMC's appeal and affirmed the jurisdiction of the Beijing High Court.

On August 14, 2007, the Company filed an amended cross-complaint against TSMC seeking, among other things, damages for TSMC's breach of contract and breach of patent license agreement. TSMC thereafter denied the allegations of the Company's amended cross-complaint and subsequently filed additional claims that the Company breached the Settlement Agreement by filing an action in the Beijing High Court. The Company has denied these additional claims by TSMC.

On August 15-17, 2007, the California Court held a preliminary injunction hearing on TSMC's motion to enjoin use of certain process recipes in certain of the Company's 0.13 micron logic process flows. On September 7, 2007, the Court denied TSMC's preliminary injunction motion, thereby leaving unaffected the Company's development and sales. However, the court required the Company to provide 10 days' advance notice to TSMC if the Company plans to disclose logic technology to non-SMIC entities under certain circumstances, to allow TSMC to object to the planned disclosure.

On March 11, 2008, TSMC filed an application for a right to attach order in the California Court. By its application, TSMC sought an order securing an amount equal to the remaining balance on the promissory notes issued by the Company in connection with the Settlement Agreement. The Company opposed the application. A hearing was held on April 3, 2008. On June 24, 2008, the Court denied TSMC's application.

In May 2008, TSMC filed a motion in the California Court for summary adjudication against the Company on several of the Company's cross claims. The Company opposed the motion and on July 25, 2008, the Court granted in part and denied in part TSMC's motion.

On June 23, 2008, the Company filed with California court a cross-complaint against TSMC seeking, among other things, damages for TSMC's unlawful misappropriation of trade secrets from SMIC to improve its competitive position against SMIC.

On July 10, 2008, the California Court held and granted part of a preliminary injunction hearing on TSMC's motion to enjoin disclosure of information on certain process recipes in the Company's 0.30 micron logic process flows to 3rd parties.

Under the provisions of SFAS 144, the Company is required to make a determination as to whether or not this pending litigation represents an event that requires a further analysis of whether the patent license portfolio has been impaired. We believe that the lawsuit is at a preliminary stage and we are still evaluating whether or not the litigation represents such an event. The Company expects further information to become available to us which will aid us in making a determination. The outcome of any impairment analysis performed under SFAS 144 might result in a material impact to our financial position and results of operations. Because the case is in its preliminary stages, the Company is unable to evaluate the likelihood of an unfavorable outcome or to estimate the amount or range of potential loss.

Summary of Third Quarter 2008 Operating Results

Amounts in US$ thousands, except for EPS and operating data

 

                                    3Q08     2Q08      QoQ     3Q07      YoY
    Revenue                      375,945  342,919     9.6 % 391,398    -3.9 %
    Cost of sales                348,721  322,077     8.3 % 349,148    -0.1 %
    Gross profit                  27,224   20,842    30.6 %  42,250   -35.6 %
    Operating expenses            40,451   60,750   -33.4 %  62,435   -35.2 %
    Loss from operations         (13,227) (39,908)  -66.9 % (20,185)  -34.5 %
    Other income expenses, net   (15,631)  (5,193)  201.0 %  (4,342)  260.0 %
    Income tax expenses           (4,499)  (2,046)  119.9 %    (966)  365.7 %
    Net loss after
            income taxes         (33,357) (47,147)  -29.2 % (25,493)   30.8 %
    Minority interest              3,094    1,603    93.0 %     859   260.2 %
    Loss from equity investment      (26)     (85)  -69.4 %    (919)  -97.2 %

    Loss attributable to
     holders of
     ordinary shares             (30,289) (45,629)  -33.6 % (25,553)   18.5 %

    Gross margin                    7.2 %    6.1 %            10.8 %
    Operating  margin                              -3.5  %    -11.6  %                        -5.2  %

        Net  loss  per  ordinary  share
          -  basic(1)                                    (0.0016)  (0.0025)                    (0.0014)
        Net  loss  per  ADS  -  basic          (0.0814)  (0.1227)                    (0.0690)
        Net  loss  per  ordinary  share
          -  diluted(1)                                (0.0016)  (0.0025)                    (0.0014)
        Net  loss  per  ADS  -  diluted      (0.0814)  (0.1227)                    (0.0690)

        Wafers  shipped  (in  8"
          wafers)(2)                                    431,660    402,114          7.3  %  458,466        -5.8  %


        Capacity  utilization                      90.5  %      92.2  %                        94.1  %


        Note:
        (1)  Based  on  weighted  average  ordinary  shares  of  18,612  million  (basic)
                and  18,612  million  (diluted)  in  3Q08,  18,589  million  (basic)  and
                18,589  million  (diluted)  in  2Q08  and  18,523  million  (basic)  and  18,523
                million  (diluted)  in  3Q07
        (2)  Including  copper  interconnects


        --  Overall  revenue  increased  to  $375.9  million  in  3Q08,  up  9.6%  QoQ  from
              $342.9  million  in  2Q08  due  to  an  increase  in  logic  sales  from  0.13
              micron  technology  nodes  and  below;  and  down  3.9%  YoY  from  $391.4
              million  in  3Q07.
        --  Simplified  ASP  increased  by  2.1%  from  $853  in  2Q08  to  $871  in  3Q08.
        --  Cost  of  sales  increased  to  $348.7  million  in  3Q08,  up  8.3%  QoQ  from
              $322.1  million  in  2Q08  due  to  the  increase  in  wafer  shipments.
        --  Gross  profit  increased  to  $27.2  million  in  3Q08,  up  30.6%  QoQ  from
              $20.8  million  in  2Q08  and  down  35.6%  YoY  from  $42.3  million  in  3Q07.
        --  Gross  margins  increased  to  7.2%  in  3Q08  from  6.1%  in  2Q08.
        --  Total  operating  expenses  decreased  to  $40.5  million  in  3Q08  from  $60.8
              million,  a  decrease  of  33.4%  QoQ  primarily  due  to  a  decrease  in  both
              research  &  development  expenses  and  general  administrative  expenses.
        --  R&D  expenses  decreased  to  $17.8  million  in  3Q08,  down  52.7%  from  $37.7
              million,  primarily  due  to  an  increase  in  government  subsidies  received
              in  3Q08.
        --  G&A  expenses  decreased  to  $10.8  million  in  3Q08  from  $13.3  million  in
              2Q08  primarily  due  to  a  decrease  in  legal  expenses.
        --  Selling  &  marketing  expenses  increased  to  $5.6  million  in  3Q08,  up
              28.1%  QoQ  from  $4.4  million  in  2Q08,  primarily  due  to  certain  tax
              expenses  in  connection  with  the  selling  activities.


        Analysis  of  Revenues

        Sales  Analysis
        By  Application                                                            3Q08            2Q08                    3Q07
        Computer                                                                        5.4  %          7.9  %                22.7  %
        Communications                                                          53.0  %        51.1  %                50.0  %
        Consumer                                                                      32.8  %        32.4  %                18.3  %
        Others                                                                            8.8  %          8.6  %                  9.0  %
        By  Service  Type                                                          3Q08            2Q08                    3Q07
        Logic(3)                                                                      87.4  %        85.7  %                66.8  %
        DRAM                                                                                2.3  %          3.6  %                23.6  %
        Management  services                                                  2.4  %          2.6  %                  3.1  %
        Mask  making,  testing,  others                                7.9  %          8.1  %                  6.5  %
        By  Customer  Type                                                        3Q08            2Q08                    3Q07
        Fabless  semiconductor  companies                        55.1  %        54.6  %                45.5  %
        Integrated  device  manufacturers  (IDM)            26.1  %        25.7  %                40.0  %
        System  companies  and  others                                18.8  %        19.7  %                14.5  %
        By  Geography                                                                3Q08            2Q08                    3Q07
        North  America                                                            58.6  %        55.1  %                44.7  %
        Asia  Pacific  (ex.  Japan)                                      34.6  %        34.7  %                26.4  %
        Japan                                                                              2.1  %          3.6  %                10.1  %
        Europe                                                                            4.7  %          6.6  %                18.8  %
        Wafer  Revenue  Analysis
        By  Technology  (Logic,  DRAM
        &  copper  interconnect  only)                                  3Q08            2Q08                    3Q07
        0.09  m                                                                          19.4  %        18.4  %                26.7  %
        0.13  m                                                                          25.1  %        22.9  %                28.6  %
        0.15  m                                                                            2.0  %          2.1  %                  2.0  %
        0.18  m                                                                          33.9  %        37.7  %                28.8  %
        0.25  m                                                                            0.5  %          0.6  %                  1.0  %
        0.35  m                                                                          19.1  %        18.3  %                12.9  %
        By  Technology  (Logic  Only)(1)                              3Q08            2Q08                    3Q07
        0.09  m                                                                          19.4  %        16.4  %                13.7  %
        0.13  m  (2)                                                                  23.2  %        21.8  %                22.7  %
        0.15  m                                                                            2.0  %          2.2  %                  2.7  %
        0.18  m                                                                          35.0  %        39.6  %                41.0  %
        0.25  m                                                                            0.5  %          0.6  %                  1.4  %
        0.35  m                                                                          19.9  %        19.4  %                18.5  %

        Note:
        (1)  Excluding  0.13  m  copper  interconnects
        (2)  Represents  revenues  generated  from  manufacturing  full  flow  wafers
        (3)  Including  0.13  m  copper  interconnects


        Capacity*

        Fab  /  (Wafer  Size)                                                                          3Q08                  2Q08
        Shanghai  Mega  Fab  (8")                                                              88,000              86,000
        Beijing  Mega  Fab  (12")                                                              36,000              40,500
        Tianjin  Fab  (8")                                                                          30,000              28,000
        Total  monthly  wafer  fabrication  capacity                        154,000            154,500

        Note:
        *  Wafers  per  month  at  the  end  of  the  period  in  8"  wafers


        Shipment  and  Utilization

        8"  equivalent  wafers                                                  3Q08              2Q08                3Q07
        Wafer  shipments  including
        copper  interconnects                                            431,660        402,114          458,466

        Utilization  rate(1)                                                  90.5  %          92.2  %            94.1  %



        Note:
        (1)  Capacity  utilization  based  on  total  wafer  out  divided  by  estimated
                capacity

        --  Wafer  shipments  increased  7.3%  QoQ  to  431,660  units  of  8-inch
              equivalent  wafers  in  3Q08  from  402,114  units  of  8-inch  equivalent
              wafers  in  2Q08,  and  down  5.8%  YoY  from  458,466  8-inch  equivalent  wafers
              in  3Q07.
        --  Logic  shipments  increased  by  9.9%  QoQ  to  396,169  units  of  8-inch
              equivalent  wafers  in  3Q08  from  2Q08  and  up  32.1%  YoY  from  3Q07.


        Detailed  Financial  Analysis

        Gross  Profit  Analysis

        Amounts  in  US$  thousands                  3Q08          2Q08            QoQ          3Q07            YoY
        Cost  of  sales                                  348,721    322,077          8.3  %  349,148        -0.1  %
              Depreciation                              165,641    153,783          7.7  %  151,720          9.2  %
              Other  manufacturing  costs    176,329    160,938          9.6  %  189,069        -6.7  %
              Deferred  cost  amortization      5,886        5,886                          5,886
              Share-based  compensation              865        1,470      -41.2  %      2,473      -65.0  %

        Gross  Profit                                      27,224      20,842        30.6  %    42,250      -35.6  %

        Gross  Margin                                          7.2  %        6.1  %                        10.8  %


        --  Cost  of  sales  increased  to  $348.7  million  in  3Q08,  up  8.3%  QoQ  from
              $322.1  million  in  2Q08.
        --  Gross  profit  increased  to  $27.2  million  in  3Q08,  up  30.6%  QoQ  from
              $20.8  million  in  2Q08  and  down  35.6%  YoY  from  $42.3  million  in  3Q07.
        --  Gross  margins  increased  to  7.2%  in  3Q08  from  6.1%  in  2Q08.


        Operating  Expense  Analysis

        Amounts  in  US$  thousands                            3Q08      2Q08          QoQ      3Q07          YoY
        Total  operating  expenses                        40,451  60,750    -33.4%  62,435    -35.2%
            Research  and  development                    17,838  37,684    -52.7%  25,906    -31.1%
            General  and  administrative                10,761  13,328    -19.3%  23,836    -54.9%
            Selling  and  marketing                            5,578    4,356      28.1%    4,901      13.8%
            Amortization  of  intangible  assets    6,906    6,899        0.1%    7,751    -10.9%
            (Income)  Loss  from  disposal  of
              properties                                                  (632)(1,517)          --          41            --


        --  Total  operating  expenses  decreased  to  $40.5  million  in  3Q08  from  $60.8
              million,  a  decrease  of  33.4%  QoQ  primarily  due  to  a  decrease  in  both
              research  &  development  expenses  and  general  administrative  expenses.
        --  R&D  expenses  decreased  to  $17.8  million  in  3Q08,  down  52.7%  from  $37.7
              million  primarily  due  to  an  increase  in  government  subsidies  received
              in  3Q08.
        --  G&A  expenses  decreased  to  $10.8  million  in  3Q08  from  $13.3  million  in
              2Q08  due  to  a  decrease  in  legal  expenses.
        --  Selling  &  marketing  expenses  increased  to  $5.6  million  in  3Q08,  up
              28.1%  QoQ  from  $4.4  million  in  2Q08,  primarily  due  to  certain  tax
              expenses  in  connection  with  the  selling  activities.


        Other  Income  (Expenses)

        Amounts  in  US$                                3Q08          2Q08              QoQ          3Q07        YoY
        thousands
        Other  expenses                          (15,631)    (5,193)      201.0  %    (4,342)      260.0  %
            Interest  income                        2,542        4,059        -37.4  %      2,819          -9.8  %
            Interest  expense                  (11,088)  (15,279)      -27.4  %  (14,791)      -25.0  %
            Other,  net                                (7,085)      6,027                --        7,629                --

        --  Interest  expense  decreased  in  3Q08  as  compared  to  2Q08  due  to  a  lower
              average  loan  balance  as  well  as  an  increase  in  the  capitalized  interest.
        --  The  increase  in  Other,  net  is  due  primarily  to  a  a  foreign  exchange
              loss  of  $7.0  million  related  to  non-operating  activities  recorded  in
              3Q08  as  compared  to  a  gain  of  $2.5  million  in  2Q08.    Combined  with  the
              foreign  exchange  gain  from  operating  activities,  the  company  recorded
              total  foreign  exchange  loss  of  $4.6  million  in  3Q08  as  compared  to  a
              gain  of  $7.8  million  in  2Q08.



        Liquidity

        Amounts  in  US$  thousands                                                  3Q08                              2Q08

        Cash  and  cash  equivalents                                          392,881                        480,265
        Restricted  cash                                                                  3,000                          91,130
        Short  term  investments                                                  50,646                          32,326

        Accounts  receivable                                                      285,874                        262,418
        Inventory                                                                          233,022                        252,394
        Others                                                                                  72,272                          64,767
        Total  current  assets                                                1,037,695                    1,183,300

        Accounts  payable                                                            301,712                        345,801
        Short-term  borrowings                                                  212,600                        242,908
        Current  portion  of  long-term  debt                          340,355                        341,630
        Others                                                                                177,736                        159,958
        Total  current  liabilities                                      1,032,403                    1,090,297

        Cash  Ratio                                                                              0.3x                              0.5x
        Quick  Ratio                                                                            0.7x                              0.8x
        Current  Ratio                                                                        1.0x                              1.1x



        Capital  Structure

        Amounts  in  US$  thousands                                                          3Q08                      2Q08

        Cash  and  cash  equivalents                                                  392,881                480,265
        Restricted  cash                                                                          3,000                  91,130
        Short-term  investment                                                            50,646                  32,326

        Current  portion  of  promissory  note                                  29,493                  29,242
        Promissory  note                                                                        37,762                  37,441

        Short-term  borrowings                                                          212,600                242,908
        Current  portion  of  long-term  debt                                  340,355                341,630
        Long-term  debt                                                                        692,131                695,292
        Total  debt                                                                            1,245,086            1,279,830


        Shareholders'  equity                                                        2,721,561            2,749,470

        Total  debt  to  equity  ratio                                                    45.7  %                  46.5  %



        Cash  Flow

        Amounts  in  US$  thousands                                                          3Q08                      2Q08

        Net  cash  from  operating  activities                                110,119                147,211
        Net  cash  from  investing  activities                              (162,773)            (320,120)
        Net  cash  from  financing  activities                                (34,668)              146,927

        Net  change  in  cash                                                                (87,384)              (26,055)


        Capex  Summary
        --  Capital  expenditures  for  3Q08  were  $242  million.
        --  Total  capital  expenditures  for  2008  are  expected  to  be  around  $790
              million.    The  capital  expenditure  is  incurred  primarily  for  the
              expansion  of  8-inch  fab  capacity,  the  conversion  of  the  Beijing  fab
              from  DRAM  to  logic  production  and  R&D  activities.
        --  We  plan  to  hold  back  any  capacity  expansion  in  2009  until  we  have  more
              visibility  of  end-customer  demands.    Currently,  the  planned  capex  for
              2009  is  around  $200  million.

 




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